Despite recording higher revenue (+4% yoy), YSP Southeast Asia (YSP)’s core net profit slipped by 37% yoy in 1Q19. The weaker-thanexpected results were mainly due to the higher cost of goods sold as a result of the weakening of Ringgit against the US$. We lower our 2019- 2020E EPS by 24-25% to factor in lower gross profit margin following our in-house US$/RM forecast revision. Maintain BUY with a lower TP of RM3.35.

1Q19 Continued to be Dragged by Higher Cost of Goods Sold…

1Q19 core net profit came in below expectations, accounting for only 19% of both our and consensus full-year estimates. YSP reported a higher revenue of RM74.7m (+4% yoy) but lower headline net profit of RM4.8m (- 28% yoy) in 1Q19. After stripping off the exceptional items (i.e. forex impact and write-offs of receivables and inventories), 1Q19 core net profit stood at RM7.1m (-37% yoy). The weak performance was mainly due to higher cost of sales, which led to a significant drop in gross profit margin (-6ppts yoy to 43% in 1Q19).

… Due to the Weakening of Ringgit Against the US$

We believe that the weakening of Ringgit against the US$ was the main culprit behind the surged in cost of goods sold as c.60% of its raw materials are purchased in US$. While its export sales could partly hedge its foreign currency exposure, we note that only c.27% of its revenue are derived from export sales (2018: c.73% domestic sales). Hence we think that the weakening of Ringgit against the US$ is unfavourable to the Group. The RM depreciated 4% yoy against the US$ during the quarter.

Maintain BUY With a Lower TP of RM3.35

Following the revision of our in-house US$/RM forecast (RM4.10 against the US$ by end-2019 vs. previous forecast of RM3.90 against the US$), we lower our gross profit margin estimates, and cut our EPS estimates by 24- 25% for 2019-2020E to account for the weakening Ringgit against the US$. Our TP is consequently lowered to RM3.35 (from RM3.85 previously) despite rolling forward our valuation horizon to 2020E but based on an unchanged PER of 14x. We continue to like YSP for its valuations and attractive dividend yields (c.3-4% per annum). Maintain BUY. Downside risks: weakening of Ringgit against the US$, product recalls and regulatory risks.

Source: Affin Hwang Research - 29 May 2019